China in Canada, part 2: Four misconceptions about China

As Harper announces visit to China, here are four misconceptions Canadians should lose. Second in a series.

By Wenran Jiang

P rime Minister Stephen Harper is going to China next month in pursuit of Chinese capital and markets for Canadian oil and other goods. But Canadians are particularly sensitive to Chinese investment. When China’s Minmetals Group was negotiating to take over the largest Canadian metal firm, Noranda, in 2004 (which eventually failed), there was barely any Chinese investment in this country. Yet alarm bells rang loud on the danger of a state-owned Chinese firm controlling a major Canadian corporation.

Now, as Chinese investment in our energy sector continues to grow with more than $16-billion in the past two years alone, so do concerns over whether the Chinese money is beneficial or harmful to Canada. A poll by the Asia Pacific Foundation found that the majority of Canadians feel uncomfortable with Chinese foreign direct investment.

This is understandable. The Canadian economy as we have known it in our lifetime is mostly integrated with that of the United States. We share a common border, language, cultural similarities, and the largest bilateral trade in the world, and we are NAFTA partners and NATO allies. Even for those who feel Uncle Sam has exploited Canada or has meddled in our internal affairs, the United States remains the devil that we know.

In contrast, China is simply an unknown to most Canadians. The China they do know is mostly derived from limited media coverage that is often incomplete and sometimes inaccurate. Analysts, policy makers and a concerned public lack a profound knowledge set on a fast-changing China. The operational motto of “Do more, talk less” that has been strictly followed by Chinese energy companies and their Canadian subsidiaries only makes things worse.

So the lack of information and misinformation leads to misperception and speculation. But this should not be the case in our public discourse on the nature of Chinese investment in Canada.

Misperception No. 1 China will control Canada’s vital resources through its increased investment, leading to the erosion of Canadian sovereignty.

This will not happen. The Chinese energy firms, like other international oil companies (IOCs), can only own the right to extract energy from the land within a given period of time, as set by a provincial government. They cannot own our land or resources. This is the case in the MacKay River project, when PetroChina became the sole operator recently, and in Sinopec’s 100% ownership of Daylight Energy. But the total Chinese investment in Canada’s energy sector remains small in comparison with American and other IOC investments. China also has much larger scale energy investment in countries such as Australia, Venezuela and Russia. Of the money the Chinese energy firms have invested in Canada, most is in minority holding positions.

Misperception No. 2 Unlike the typical privately owned international oil corporations, Chinese energy companies are state-owned; thus they may operate under non-market rules, or function as the agents of the Chinese government.

The reality is far more complicated. Take the largest Chinese energy company, China National Petroleum Corp., which is state-owned. Under it lies PetroChina, the external arm of CNPC that is listed in both New York and Hong Kong. Obliged to operate according to international norms like other IOCs, PetroChina has a Canadian subsidiary in Calgary, which has to follow Canadian regulations. For the MacKay River oil sands project, in which PetroChina’s Canadian subsidiary is now the sole operator, a new company called Cretaceous Oilsands Holding Ltd. has been created. It is close to impossible for such a new firm, registered in Alberta with its entire existing Canadian management team and workforce in place, to follow rules other than Canadian ones, or to do anything other than its designated commercial function, let alone become an agent of the Chinese state.

Misperception No. 3 Increasing Chinese participation, especially in cases of full ownership of Canadian energy extraction, may undermine Canada’s labour, human rights and environmental standards since Beijing’s domestic records in these areas are poor.

China will not be able to change anything in these areas unless Canada undermines its own standards. It is true that the Chinese standards on environment, human rights and labour laws are lagging behind Canadian ones, and as a result, China pays substantial costs and setbacks associated with its fast growth in GDP. It is also true that some of the Chinese overseas investors, especially privately owned medium and small enterprises, performed poorly in these areas where local standards are low and corruption rampant. I have witnessed such practices in my field research on Chinese enterprises in Africa. But Canada is not one of those states without clear rules. And state-owned Chinese firms are also becoming more sensitive to their image abroad. Since they all want to establish themselves in Canada for long-term operations, Chinese firms have strong incentives to conform to labour, environment and other well-established norms here.

Misperception No. 4 More Chinese and Asian investment in our energy sector may inevitably lead to large-scale oil and gas exports to China and Asia, depleting the valuable and finite resources that Canada should preserve for its own future use.

How to manage our natural resources is primarily a Canadian decision, not one that is made in Beijing or other capitals. The current Canadian debate on West Coast access for shipping oil and diversification to Asian market is due to the realization that Canada is vulnerable in having only the United States as its energy export destination. The Chinese firms, while they hope to import Canadian oil and gas and while they support Enbridge’s Gateway pipeline, have not made shipping the current or future output to China as a condition of their investment. It is up to Canadians to decide whether we want to build pipelines to the West Coast to prevent Canada from losing billions of dollars in revenue, jobs and taxes.

While Canadians worry about the negative impact of Chinese investment, current or potential, they should also be aware of its benefits. First, more investment from China and other Asian countries will supply much needed funding for the long-term sustainable development of Canada’s largest economic sector. It will also make the Canadian foreign-investment portfolio more diversified, since it has been dominated mostly by U.S. firms.

Second, all ventures involving Chinese firms are creating Canadian jobs. The MacKay River project will preserve well over 90% of the Canadian employees and the existing management team, with only a small group of Chinese technical managers coming to work in the field. The newly created Sinopec Daylight Energy, another Canadian company owned by the Chinese, operates the same way.

Third, the Canadian energy industry, while gaining more access to Chinese capital, will become more competitive globally through energy co-operation with Chinese firms, not only in Canada but also in the United States and in other parts of the world. China has large domestic reserves of heavy oil and shale, and Beijing is seeking foreign participation in developing these unconventional oil and gas resources. Canadian companies are well positioned to take advantage of such market potentials.

Finally, Chinese energy investment can serve as a driver that expands into other areas of Canada-China economic co-operation, especially in sectors such as mining, meat and agriculture products, tourism and education.

Of all the sins of the Chinese development model that one can list, ranging from inequality to lack of human rights to rampant corruption to environmental degradation, Chinese investment in Canada is certainly not among them.

Chinese firms in Canada obey our laws, pay royalties and taxes, and work hard in learning how to become good corporate citizens of Canada. They have invested so much money here that it is in their best interests to behave well and to be welcomed by Canadians.

The challenge for Canada is not that we have too much Chinese investment and joint ventures, but too little. If Chinese investment continues to come and if we maintain the necessary regulatory framework to benefit from the Chinese participation in our energy sector, wise engagement strategies will enable Canada both to take full advantage of the vast and fast-growing Chinese market and to contribute to the peaceful rise of the next global superpower.

Financial Post
Wenran Jiang is a political science professor at the University of Alberta, a senior fellow at the Asia Pacific Foundation of Canada and a special advisor on China to the U.S. and Canada-based Energy Council.

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